Original URL: http://www.theregister.co.uk/2008/12/04/novell_q4_2008_numbers/

ARSes crush Novell profits

Could be worse

By Timothy Prickett Morgan

Posted in Financial News, 4th December 2008 23:54 GMT

Software maker Novell has reported financial results for its fiscal fourth quarter of 2008 ending October 31, and the meager profits that the reorganized company was able to eek out were mostly wiped out by an impairment charge related to its investment in auction rate securities. ARSes, for short.

Sales in the quarter came to $244.7m, down a smidgen and just a few million bucks shy of Wall Street's expectations. The net loss in the quarter came to $16.3m, but that included a $14m charge for the ARS impairment.

These ARS investment instruments are the same ones that left municipalities and states across America flat-footed in February of this year when people figured out that ARSes are only as good as cash so long people are willing to buy and sell them.

All things considered, Novell did pretty well in the quarter, but showed some softness in its services biz. Software license sales were up a fraction of a percent to $51.4m, while maintenance and subscriptions (the latter mostly for open source products, and mostly relating to SUSE Linux) rose by 7.9 per cent to $158.8m. The services business - which includes tech support, training, and other professional services - had a decline of 26.1 per cent to $34.6m.

Dana Russell, Novell's chief financial officer, said in a conference call after Wall Street shut down for the day that Linux invoicing in the quarter was $46m, up only 2 per cent. He added that the deal with Microsoft, which allows the Windows maker to distribute SUSE Linux to customers, helped invoicing in prior quarters but that starting in early fiscal 2010, these hybrid Windows-Linux shops could start kicking in again as their contracts (which were mostly for three year licenses and which were signed largely in 2007) come up for renewal.

In terms of Novell's future, the Open Platform division, which includes SUSE Linux and other open source products that are distributed under a subscription model, sales rose by 36.1 per cent to $35.8m, and $30.5m of that was for Linux. Of course, Novell still sells NetWare (but less and less of it) and the hybrid Linux-NetWare lovechild called Open Enterprise Server. These NetWare-ish products and related GroupWise and a bunch of other software are lumped together into the Workgroup division.

In the fiscal fourth quarter, NetWare and OES sales fell by 4.3 per cent to $54.6m and collaboration software sales rose by 3.3 per cent to $29.4m. Adding in all the other stuff, the Workgroup division had sales of $91.9m, down 5.8 per cent because that other software took a big hit.

Identity and security management reported sales of $37.3m in fiscal Q4, up 6.4 percent. Systems and resource management, which has been bolstered by Novell's $205m acquisition of virtualization management specialist PlateSpin earlier this year, reported $45.1m in sales, up 15.3 per cent, thanks to PlateSpin.

For the Year

For the full year, Novell reported sales of $956.5m, up 2.6 per cent, and a net loss of $8.7m, which was a lot better than the $44.5m loss it had in fiscal 2007. The Open Platforms division accounted for $128.8m in sales in the full fiscal year, up 37 per cent, and the Workgroup division posted sales of $366.2m, down 1.8 per cent. OES was a stopgap product to help preserve the NetWare base and maybe convert some workloads to Linux, and by and large the strategy has worked. But it has not yielded the kinds of profits Novell wants. For fiscal 2008, Novell's identity and security management products had $137.2m in sales, up 9.2 per cent, while its systems and resource management products accounted for $170.5m in sales, up 15.4 percent.

Novell has burned a bit of cash doing acquisitions, buying back its own stock, buying back debentures, and running itself in the past year. The company had just under $1.1bn in cash and equivalents and $777m in short-term investments as fiscal 2007 came to a close, but finished fiscal 2008 with only $680m in cashish and $387.8m in short term investments. Novell had around 4,000 employees, down about 100 from the prior quarter because of restructurings.

Ron Hovsepian, Novell's president and chief executive officer, said in the call that of the $240m in SUSE Linux licenses that Microsoft said it would acquire with its landmark November 2006 partnership, $195m have been invoiced so far. He added that Microsoft has agreed to buy $100m in additional SUSE Linux licenses for servers and has taken $25m worth of licenses from this second round that will be booked in the first quarter of fiscal 2009. (Why not just clean out the first round of licenses? Good question. But this is the IT business).

Hovsepian said that Novell added more than 3,000 Linux customers in fiscal 2008 and gained 3 per cent of market share in the Linux space and outgrew the Linux industry (which he pegged at 22 percent growth). And he banged on about how SUSE 9 and SUSE 10 have 2,500 certified applications, which he claimed is more than for other Linuxes. (This means you, Red Hat). Such claims are dubious from all operating system makers.

All in all, Hovsepian was pretty upbeat, saying that when Novell started out fiscal 2008, it was expecting double-digit declines in its legacy NetWare and OES business, but only saw a decline of 1.8 per cent. He added that there was some softness in the fourth quarter and said Novell would be cautious and monitor the situation.

He added that Novell was pleased that over 60 per cent of Novell's revenues come from recurring maintenance or subscriptions, but said Novell was not comfortable, given the current economy climate, to make projections for future quarters individually or for fiscal 2009. Russell added that Novell felt "feels good" about the first quarter of 2009 so far, but forget about getting any hard numbers. ®